UPDATE 2-SouthGobi drops sharply on Hong Kong debut

* Stock falls 12 pct on debut, (.HSI: ) index down

* Analysts say valuation much higher than peers

* Chief executive said expected stock to open down (Adds
CEO comment, details)

By Kennix Chim and Joseph Chaney

HONG KONG, Jan 29 (BestGrowthStock) – Shares in Canadian coal miner
SouthGobi Energy Resources Ltd (1878.HK: )(SGQ.TO: ) fell about 12
percent in their Hong Kong debut on Friday, hurt by the stock’s
overly high valuation and poor timing.

SouthGobi, which raised $439 million in its IPO, is the
second company to list in Hong Kong in 2010 after Russia’s UC
RUSAL (0486.HK: )(RUSAL.PA: ). Both trade at double-digit
percentages below their offering prices. [ID:nTOE60Q020]

Worries about monetary policy tightening in China have
pressured stock markets in Asia, hurting initial public
offerings both in Hong Kong and on the mainland.

On Thursday, shares of power transmission equipment maker
China XD Electric (601179.SS: ) also fell below their IPO price
in their Shanghai debut, the market’s worst debut since 2006,
underscoring poor investor sentiment. [ID:TOE60QAJ]

SouthGobi, also listed in Canada, fell as low as HK$105.6
in early trade in Hong Kong and by 0700 GMT were quoted at
HK$108, compared with its IPO price of HK$126.04.

“Peers have fallen by about 15 percent since — where it’s
trading now, we are quite happy. We expected it to open down
because it’s a soft market,” SouthGobi President and CEO
Alexander Molyneux told Reuters.

Hong Kong’s benchmark Hang Seng Index (.HSI: ) has dropped 7
percent this year. Coal miners have been weak, with China
Shenhua Energy (1088.HK: ) down 15.7 percent since SouthGobi
started its IPO roadshow on Jan. 11.

Analysts also noted SouthGobi’s valuation was much higher
than its peers and the company had suffered losses in recent
years, though they expect a turnaround from this year.

SouthGobi, owned by Canada-based Ivanhoe Mines (IVN.TO: )
(IVA.AX: ), is valued at 51.6 times and 21.3 times 2010 and 2011
estimated enterprise value to earnings before interest, tax,
depreciation and amortization (EV/EBITDA), respectively,
according to BMO Capital Markets.

By comparison, China’s largest coal producer China Shenhua
Energy trades at 9.8 times 2010 estimated EV/EBITDA and 8.7
times for 2011. Coking coal producer Hidili Industry (1393.HK: )
is trading at 14.4 times and 9.2 times 2010 and 2011,
respectively, according to Citigroup research reports.

SouthGobi sold 27 million new shares, about 16.8 percent of
its enlarged share capital, and secured Asia’s top sovereign
wealth funds, China Investment Corp (Read more about U.S. companies investment into China) [CIC.UL] and Temasek
Holdings [TEM.UL] as cornerstone investors, each subscribing to
$50 million worth of shares with a six-month lock-up period.

Citigroup (C.N: ) and Macquarie (MQG.AX: ) handled the deal.

Of the offered shares, 64.5 percent were allocated to
institutional investors, 25.5 percent to Hong Kong retail
investors and 10 percent to Canadian investors.

MONGOLIA EXPANSION

The company said it was focused on expanding its coal
production capacity in Mongolia, centred around its Ovoot
Tolgoi mine 40 km from the border with China.

Since the start of production at the mine in late 2008
until the end of September 2009, the company sold about 1.1
million tonnes of coal, SouthGobi said, adding it planned to
eventually extract 8 million tonnes of metallurgical and
thermal coal per year for Ovoot Tolgoi from 2012.

SouthGobi reported a $41.7 million net loss in
January-September versus a year-earlier net loss of $52.6
million, due to substantial start-up mining costs.

It has forecast a 2009 net loss of no more than $111.2
million.

Investment

(US$1=HK$7.75)

UPDATE 2-SouthGobi drops sharply on Hong Kong debut